New airline deal will raise ticket prices

What the American-US Airways merger means for fliers

The $11-billion deal, announced on Thursday, that will unite American Airlines parent AMR
US:AAMRQ
and US Airways Group
US:LCC
into the world’s largest airline will likely push up fares and fees for passengers. The good news, say travel experts: It won’t happen right away. “In the long run, ticket prices will go up, but in the short run, they will stay competitive,” says Rick Seaney, chief executive and co-founder of FareCompare.com.

That’s partly because the mechanics of coalescing operations, systems and workforces following an airline merger can take anywhere from 18 months to two years and neither system wants to risk losing customers in the process.

Reuters

That means loyalty miles will likely remain untouchable — and may even become more valuable, Seaney says. “Airlines are aware during these mergers that they may make some of their best customers upset,” he adds. “There’s no upside to alienating their best business travelers.”

The merger is transforming the two carriers into the largest in the U.S., surpassing today’s biggest — United Airlines
UAL, -1.02%
— in both capacity and traffic. American Airlines and US Airways have little overlap at hubs and routes. It’s unclear still how the two will handle their hubs. US Airways has hubs in Phoenix, Charlotte and Philadelphia with American hubs in Dallas, Chicago, New York, Los Angeles and Miami. US Airways Chief Executive Doug Parker will run the business while American Chief Executive Tom Horton will chair the board until its first shareholder meeting, which isn’t likely to happen until late next year.

Parker, appearing on “CBS This Morning,” tempered concerns about rising fares by touting the scale of the merged carriers, noting that they were “highly complementary” without “much overlap at all.”

“We’ve combined to create an airline that can compete against the other two airlines that happen to be larger than us right now -- United and Delta -- to create an airline that can compete strongly against us. So it’s more competition, not less.”

Mergers typically reduce competition because they take a player out of the game, and competition among airlines tends to favor passengers, leading to better ticket and fee prices and more routes. In contrast, reduced capacity — that is, fewer planes in the air — gives the airlines a leg up, because they can charge more for less supply.

Jamie Baker, an airline analyst at JPMorgan, says the Big Four airlines -- which will include the merged airline, Delta
DAL, -0.69%
, United and Southwest
LUV, -0.07%
-- combined will boast a whopping 88% of the market.

Though American and US Airways don’t have “much overlap,” as Parker notes, what common routes they do have, such as those at Washington-Reagan National Airport, will certainly be pared back. Moreover, in an industry that follows the herd mentality – when one airline raises fares or fees, the others follow – the world’s biggest airline will hold much sway among its competitors. Already for the past four years, airlines, in tandem, have been steadily raising fares as well as costs for ancillary services, such as checked bags, itinerary changes and even seat selection.

In a study released late last year, PriceWaterhouseCoopers said that when inflation is factored in, airfares have risen only 7% since mid 2008 and have not kept up with the escalating costs of fuel and labor, an airline’s two biggest cost factors.

However, the spikes in ancillary revenue – mostly baggage, standby, and cancellation and change fees – leave passengers with a higher “effective” price for travel, the report says. In the first half of 2012 alone, the largest carriers collected more than $1.75 billion just in baggage fees, an expense that hiked airfare by nearly 3%.

“And when all other fees and miscellaneous operating revenues collected are averaged across airline passengers, close to 9% is added to the average base airfare,” the PWC study says, noting that these are expansive fee policies adopted by the industry, not necessarily merger related.

Last year, carriers boosted fares five times, though it took 13 attempts. They also hiked 52 different fees, according to an analysis by TravelNerd, an online comparison and research tool. Of those, 28 were tied to baggage fees, while 19 were related to service fees, most notably adjustments to travel plans, seat selection and priority boarding. In some cases, carriers unbundled one fee for priority boarding and seating into two separate fees. Five changes were linked to in-flight fees for everything from blankets and food to unaccompanied minors.

What it means for passengers is that two sitting next to each other could have paid vastly different prices for the same flight. And as more and more people pay for priority boarding, it devalues the privilege as well as the elite status that frequent fliers have obtained. “I’ve seen lots of travelers getting outraged by these changes,” says Alicia Jao, vice president of travel media at TravelNerd.

Recently, for example, a JetBlue plane from New York to Los Angeles was diverted temporarily to Denver International Airport to unload a woman who became furious when a man was moved from economy seating to a seat next to her in the premium rows, without having to pay for the upgrade.

Right now, American and US Airways have few discrepancies in charges, according to TravelNerd’s study. Both collect roughly $4 to $99 for seat selection and priority boarding, though American tacks on a fee for premium seating that can go as high at $159. Both assess $25 charges for booking tickets over the phone, and making itinerary changes by phone will set customers back by $175.

American charges $10 to $25 more for overweight baggage but is more generous, by $50, for four or more bags. “You’ll see those costs follow American’s,” Seaney says.

Until operations are fully meshed, passengers shouldn’t worry about extra charges or whether their US Airways tickets will be honored on flights that are renamed American, as expected. “They will operate as separate airlines for at least 18 months,” Seaney says.

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